FOREX-Dollar weakens as Fed seen likely to stoke inflation

NEW YORK, Oct 17 The U.S. dollar retreated from
seven-month highs on Monday as investors evaluated whether the
Federal Reserve will let inflation run above target before
raising interest rates, and as some investors took profits from
the recent dollar rally.

Fed Chair Janet Yellen said on Friday that the U.S. central
bank may need to run a "high-pressure economy" to reverse damage
from the 2008-2009 crisis that depressed output, sidelined
workers and risks becoming a permanent scar.

"The question is if the Fed is going to let inflation run
hot and then have to tighten very aggressively at the back end
of the cycle, which would have potentially negative economic
implications," said Mark McCormick, North American head of FX
strategy at TD Securities in Toronto.

At the same time, "I think the market is starting to take a
little bit of profits on the long U.S. dollar trade that has
been doing pretty well over the last couple of weeks," he said.

The dollar index was last down 0.10 percent at
97.914, after rising to 98.169 in overnight trading, the highest
since March 10.

The dollar also weakened against the euro before the
European Central Bank is due to meet on Wednesday.

The ECB is expected to extend its quantitative easing
program, though it is also viewed as likely to taper purchases
next year.

"The market broadly sees that the ECB is going to be
somewhat more positive on the outlook for Europe this week,"
said Richard Cochinos, Citi's G10 FX strategist in London.

"They still will need to announce more accommodative policy
next year, but it does seem that they may also believe the need
for ever greater accommodation is decreasing. That is leaving
the euro positive on the (non-dollar) crosses."

The euro, which fell below $1.10 for the first time in
almost three months last week, gained 0.26 percent to $1.1099.

The U.S. dollar briefly added to losses earlier on Monday
after data showed factory activity in New York State weakened
further in October.

Other data showed that U.S. industrial production barely
rose in September as a rebound in manufacturing output was
offset by a decline in utilities production, suggesting a
moderate acceleration in economic growth in the third
quarter.
(Additional reporting by Patrick Graham in London; Editing by
Meredith Mazzilli)

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